John Hancock Mortgage-Backed Securities ETF (JHMB)

Mortgage-backed securities are a cornerstone of fixed-income markets, yet they behave in ways that confound many investors. They are issued or guaranteed by three government-sponsored enterprises — Fannie Mae, Freddie Mac, and Ginnie Mae — and represent claims on pools of 30-year, 15-year, or shorter U.S. residential mortgages. The John Hancock Mortgage-Backed Securities ETF holds a diversified collection of these agency securities, tracking an index that encompasses the broad U.S. mortgage market. The fund pays monthly income to shareholders, drawn from the interest and principal payments that flow through from homeowners’ monthly mortgage payments.

On the surface, mortgage securities offer yield similar to Treasury bonds of equivalent maturity, with the added cushion that the securities are backed by physical real estate and by government guarantees. They trade with tight spreads to Treasury bonds and benefit from deep liquidity, since the mortgage market is the largest fixed-income market in the United States. JHMB can be held as a core bond position in a diversified portfolio, offering higher yields than Treasuries at only marginally higher credit risk because the government guarantee insulates investors from actual default. The fund’s expense ratio is modest, and daily trading volumes are solid, making it a practical holding for long-term bond portfolios.

The complication lies in what happens when interest rates change. Unlike a regular bond, which has a fixed maturity date and known cash flows, a mortgage security’s cash flows depend on homeowners’ refinancing behavior. When mortgage rates fall and homeowners have an incentive to refinance, they often do, and mortgage pools prepay their principal far faster than the original 30-year term would suggest. That principal comes back to the investor, who must then reinvest it in a lower-rate environment. Conversely, when rates rise and homeowners have no reason to refinance, pools extend in maturity and the investor is locked into below-market coupons for longer. This is prepayment risk, and it is the reason mortgage securities underperform in certain rate scenarios that would be favorable for regular bonds.

A simple illustration: suppose an investor buys a mortgage security yielding 5% when comparable Treasuries yield 4%. Rates then fall, and Treasury yields drop to 3%. The mortgage security’s price would ordinarily rise to keep pace with the Treasury, but homeowners refinance and the pool prepays at par, which caps the investor’s gain. The investor gets back principal at par and must reinvest at 3%, suffering an opportunity cost. In the opposite scenario — rates rise to 6% — regular bonds fall in price, and the mortgage security also falls, but homeowners do not refinance, so the pool extends to 30 years and the investor endures the below-market 5% coupon for decades longer than expected. This negative convexity (asymmetric price performance) is what makes mortgages a more complex holding than they appear.

JHMB’s portfolio is typically weighted heavily toward the current-coupon (most recently issued) loans, which is where liquidity is highest, but the fund still carries meaningful duration — typically four to six years depending on the rate environment and prepayment assumptions. When interest rates fall sharply, the fund’s price can underperform the broad bond market. When rates rise, the fund may outperform in the near term (because mortgages’ yield cushion is valuable), but longer-term extension risk can become a headwind.

The fund is appropriate for conservative investors seeking higher yield than Treasuries with government backing, for those managing bond ladders who want intermediate-maturity instruments, and for institutions needing large, liquid fixed-income holdings. It is less suitable for investors with short time horizons or those who are rate-sensitive to the downside. The prospectus and fact sheets detail the fund’s weighted average coupon, its weighted average maturity, its breakdown by issuer (Fannie Mae, Freddie Mac, Ginnie Mae), and any exposure to unusual coupon pools or servicing-fee spreads. Watching broader mortgage market spreads — the gap between mortgage yields and Treasury yields — gives a sense of whether the market is pricing MBS fairly. Changes in prepayment speed estimates, reflected in indices and dealer research, are early signals of whether extension or contraction risk is building.